Captive Insurance Claims: Legal Considerations to Prioritize

Depending on your envisioned structure, the risk factors can eliminate the possibility of tax savings. Plus, your initial savings on insurance premiums can be diminished by claims and transaction administration costs.

Although some businesses consider these as "deterrents," some continue to find workable solutions that move captive programs forward. Still, it pays to be vigilant with your captive insurance matters. Work with a trusted captive insurance lawyer to discuss the legal considerations associated with captive claims.

There are many issues that do not arise until the business faces a massive loss. For instance, when the captive must pay for a large loss claim, they may lack a solid procedure for accounting and handling the mechanics of claims payments, re-capitalizing the captive or adjusting future premiums due to the loss. While these issues are unlikely to cause significant, long-term problems, they can create internal disruptions if the business expects the captive to settle the claim in a similar way a commercial insurer will.

If there is any conflict between the commercial insurer and the captive, more issues can arise. Even when the policyholder does not purchase commercial insurance, other insurance can be involved through pre-existing contracts or policies containing insurance provisions and indemnification.

The interaction between commercial insurance and a captive can lead to unprecedented loss situations, which may expose the captive to greater risks. Instead of worrying about risks, it's best to avoid them.

From the perspective of the company, separately managed captives can be viewed as 'friendly' subsidiaries instead of independent commercial insurance companies. On the contrary, commercial insurance companies create positions that oppose the policyholder.

Conflicts between captives and commercial insurers can arise when the former issues primary coverage below the amount issued by the commercial insurer. For instance, an insurer's excess to a captive policy may defer the proof of the exhaustion of a captive policy. Some may even claim the unreasonable reimbursement of defense costs. In the end, the other insurer must pursue the captive as though they were a commercial insurance company, disregarding the captive's purpose or role within the insurance structure.

After a significant loss, other legal issues can arise that may influence the captive's payment obligations. For most corporate policyholders, they do not purchase insurance to cover the company's losses in case they can't pay it without help from insurance. Apart from compliance reasons, companies use insurance to manage the losses that may impact earnings, cash management or budgets. While captives can ensure compliance with insurance requirements, getting a pure captive to meet your financial objectives is more challenging.

There is also a possibility that the captive arrangement may not yield the savings you anticipate. Still, this should not be a reason to dismiss the captive's benefits, especially when it has a proper structure, as well as if you can mitigate the risks.

Anyone familiar with captive programs knows that a continuing and large investment is the key to success in set-up and maintenance. Therefore, it's important to be careful if your company is told to expect a captive so you can receive a maintenance-free alternative to commercial insurers.

Captive insurance is a tricky maze to navigate on your own. They can analyze your case, as well as recommend if a lawsuit is worth it.

Instead of dealing with claims in the future, work with a trusted captive insurance lawyer who can offer the following:

- Counseling on regulatory requirements regarding licensure and application
- Advice on securities and corporate laws
- Counseling on corporate governance, company operation and other compliance matters

Reduce your risks with captive insurance by working with a licensed attorney.